Gilt Fund Blues

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On January 1, 2009 as I was reviewing my portfolio or, whatever is left of it, one asset class that looked attractive was Gilt Funds. In the Oct-Dec 2008 quarter when NAVs of equity funds went down in line with the stock markets, the Gilt Funds gave over 10 % return. Seeing that the inflation was coming down rapidly and RBI was making announcements about rate cuts, it appeared logical that bond prices would go up making Gilts attractive.

Around the same time the banks were also reducing the deposit rates, I decided to invest in a Gilt Fund on Jan 1. Assuming Gilt Funds are steady, I did not look at the NAV regularly. Yesterday, when I looked at the investment I was shocked to see losses on my Gilt Fund investment. 12 % loss in a matter of 2 and a half months. Over 50% drop, if annualised.

A study of what could have been the possible reason, revealed this : I had invested in Gilt Fund at probably the lowest yield in January. Bloomberg says that ” The yield on the note has climbed 1.99 percentage points since reaching a record low of 4.85 percent in January.” Government borrowing is the main culprit. Bloomberg says that ” India plans to sell a record 2.61 trillion rupees ($50.3 billion) of bonds in the fiscal year ending March 31, an increase of 67 percent from the previous 12 months and 80 percent more than initially planned. Sales are estimated at 3.62 trillion rupees for the next fiscal year.”

Mumbai-based Raghavan, a primary dealer who underwrites government debt sales says “Yields should continue to rise in the near term.”

Understanding the yield curve and the factors which affect the bond prices is not as simple as I thought. I am humbled. I’ll continue to hold the Gilt Fund, with the hope that the fund will yield the coupon rate of GoI bonds – 8.25% over a two to three year term.